Expertise the key for independent directors

As South Africans, we have become spectators of ongoing sagas in corporate governance having gone wrong.

As South Africans, we have become spectators of ongoing sagas in corporate governance having gone wrong.

Examples abound, the latest of which involve the very institutional investors who are supposed to promote corporate governance through responsible investing practices who seem to be flouting the requirement of the King code by failing to put remuneration policies to shareholders' vote.

In that same industry, disciplinary proceedings against an executive have been pursued under circumstances that are anything but transparent.

This is not to mention the failure of a good number of public sector boards to stem the ongoing decay at the entities they serve.

Reflecting on this mayhem, it is probably justifiable to question whether the King Code of Governance Principles is promoting the standard of excellence.

Has it perhaps become one of those establishments that is tolerated and respected for the sheen of respectability that it brings, but which in reality is no more than a ceremonial detail?

Recent headlines such as "The flaw in King's board formula" and "The King code got it wrong" suggest the King may be scantily clad.

Both articles contend that the presence of independent directors on boards, as recommended in King, adds little or no value, because these directors are too far removed from either the company or the relevant industry to make a meaningful contribution.

The failure of African Bank, compared with the success of Capitec, despite their similar business models, as well as various studies, are cited in support of this view.

This is a view with which I can sympathise.

However, at the risk of sounding defensive, since I was involved in the creation and promotion of the King code, I attribute the problem not to the code getting it wrong, but rather to the peculiar mindset shown to its application.

To illustrate this, let's use the example at hand, namely independent directors.

The reason for having independent directors on a board is, first, to provide objective monitoring of management as a protection mechanism for shareholders and other stakeholders against potential managerial excesses.

Second, independent directors should contribute to performance by constructively challenging the business strategy, direction and decisions proposed by management.

The idea is that these directors should provide this additional perspective, which results in a more robust strategy that delivers better results and improved performance.

Considering the above, it seems clear that without the required knowledge of an industry or relevant experience, directors would be unable to oversee, challenge and contribute.

It is more likely that these hapless individuals knowingly or unknowingly defer to executive knowledge.

But objectivity and knowledge are required to be an effective board member.

Sacrificing industry knowledge and experience on the altar of independence is typical of the application of a recommended practice without consideration for its context. As the saying goes, common sense is not so common after all.

Speaking of context, I recently read a fascinating article about the influence of context on decision making.

The authors, David Snowden and Mary Boone, argue (my paraphrasing, with apology to the authors) that when leaders make decisions, they often make assumptions founded on linear Newtonian thinking that supposes that the world is more ordered and predictable than it is.

Linear thinking may very well be appropriate in simple contexts to be found in process-oriented situations, but it does not offer solutions within a complex context.

Ensuring an appropriate board composition qualifies as a complex undertaking because there is a dynamic interplay of factors that influence cause and effect - one such factor being independence and its potential effect on industry experience.

Interestingly, the authors point out that an appropriate response to a complex challenge is not to "categorise", as one would with a simple context, but to respond analytically.

Now, I submit that this is exactly where the issue lies when it comes to board composition.

Instead of addressing board composition as a complex challenge, which it is, some boards and shareholders deal with this as if it were a mere question of process.

This, in turn, results in an undue emphasis on categorising, instead of analysing the dynamic of all the factors.

And this is exactly how we arrive at the notorious box-ticking approach to governance.

The litmus test for sound corporate governance implementation is always whether it has led to sustainable value creation for the company and its stakeholders over the long term. But no need to belabour the obvious, right?

Ramalho is leading the project to draw up the new King IV Governance Code obo the Institute of Directors in Southern Africa and the King Committee